ECB keeps rate but boosts QE, starts new loan program

March 12, 2020

By CentralBankNews.info
The European Central Bank (ECB) surprised financial markets by maintaining its key interest rates, which are essentially already at the zero lower bound, but boosted its purchases of assets by 120 billion euros and will launch a new round of targeted longer-term refinancing operations (TLTROs) to “support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises.”
The ECB, the central bank for the 19 countries that share the euro currency, has maintained its benchmark refinancing rate at 0.0 percent and the lending rate key at 0.25 percent since March 2016, but lowered its deposit rate in September 2019 to the current level of minus 0.50 percent.
“Although the Governing Council does not see material signs of strains in money markets or liquidity shortages in the banking system, these operations will provide an effective backstop in case of need,” the ECB said, referring to additional longer-term financing operations.
The ECB confirmed its earlier guidance that it expect key rates to “remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below 2% within its projection horizon…”
A new round of targeted longer-term financing operations (TLROs) will begin in June and run until June 2021 but to bridge this gap, the ECB said it would conduct additional longer-term financing operations (LTROs) at fixed rate tenders will full allotment at a rate that is equal to the average rate on the deposit facility to “provide immediate liquidity support to the euro area financial system.”
TLTROs became part of the ECB’s non-standard monetary policy tools in 2014 and a second one, known as TLTRO-II, was launched in March 2016.
Banks that participated in those programs were able to borrow up to 30 percent of their outstanding loans to businesses and consumers, boosting the amount that banks can lend to the real economy at lower interest rates than the ECB normally offers.
Loans under TLTRO-III will be on more favorable terms, the ECB said, to support lending to business most affected by the spread of the coronavirus, known as Covid-19, with interest rates as low as 25 basis points below the average interest rate on the main refinancing operations.
For banks that maintain their levels of credit provision, the rate applied on these operations will be as low as 25 basis points below the average deposit facility over the period ending in June 2021.
In addition, the maximum amount that banks can borrow under TLTRO-III is raised to 50 percent of their outstanding loans, and the ECB will look into collateral easing measures.
In September last year the ECB restarted an earlier asset purchase program – known as quantitative easing (QE) – and began to purchase assets worth 20 billion euros from Nov. 1, 2019.
The earlier asset purchase program was completed at the end of 2018 after the ECB had accumulated some 2.6 trillion euros of bonds.
Today, the ECB said “a temporary envelope” of additional net asset purchases of 120 billion will be added until the end of the year and in combination with the existing asset purchase program (APP) will “support favorable financing conditions for the real economy in times of heightened uncertainty.”
The ECB confirmed its earlier guidance that it expects these asset purchases to “run for as long as necessary to reinforce this accommodative impact on its policy rates, and to end shortly before it starts raising the key ECB interest rates.”
Reinvestments from its maturing securities purchased under APP will also continue “for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.”

     The European Central Bank released the following monetary policy statement and a statement regarding banking supervision:

“At today’s meeting the Governing Council decided on a comprehensive package of monetary policy measures:
(1) Additional longer-term refinancing operations (LTROs) will be conducted, temporarily, to provide immediate liquidity support to the euro area financial system. Although the Governing Council does not see material signs of strains in money markets or liquidity shortages in the banking system, these operations will provide an effective backstop in case of need. They will be carried out through a fixed rate tender procedure with full allotment, with an interest rate that is equal to the average rate on the deposit facility. The LTROs will provide liquidity at favourable terms to bridge the period until the TLTRO III operation in June 2020.
(2) In TLTRO III, considerably more favourable terms will be applied during the period from June 2020 to June 2021 to all TLTRO III operations outstanding during that same time. These operations will support bank lending to those affected most by the spread of the coronavirus, in particular small and medium-sized enterprises. Throughout this period, the interest rate on these TLTRO III operations will be 25 basis points below the average rate applied in the Eurosystem’s main refinancing operations. For counterparties that maintain their levels of credit provision, the rate applied in these operations will be lower, and, over the period ending in June 2021, can be as low as 25 basis points below the average interest rate on the deposit facility. Moreover, the maximum total amount that counterparties will henceforth be entitled to borrow in TLTRO III operations is raised to 50% of their stock of eligible loans as at 28 February 2019. In this context, the Governing Council will mandate the Eurosystem committees to investigate collateral easing measures to ensure that counterparties continue to be able to make full use of the funding support.
(3) A temporary envelope of additional net asset purchases of €120 billion will be added until the end of the year, ensuring a strong contribution from the private sector purchase programmes. In combination with the existing asset purchase programme (APP), this will support favourable financing conditions for the real economy in times of heightened uncertainty.
The Governing Council continues to expect net asset purchases to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
(4) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.
(5) Reinvestments of the principal payments from maturing securities purchased under the APP will continue, in full, for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
Further details on the precise terms of the new operations will be published in dedicated press releases this afternoon at 15:30 CET.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today”
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“ECB Banking Supervision provides temporary capital and operational relief in reaction to coronavirus

12 March 2020
  • Banks can fully use capital and liquidity buffers, including Pillar 2 Guidance
  • Banks will benefit from relief in the composition of capital for Pillar 2 Requirements
  • ECB to consider operational flexibility in the implementation of bank-specific supervisory measures
The European Central Bank (ECB) today announced a number of measures to ensure that its directly supervised banks can continue to fulfil their role in funding the real economy as the economic effects of the coronavirus (COVID-19) become apparent.
“The coronavirus is proving to be a significant shock to our economies. Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties. The supervisory measures agreed today aim to support banks in serving the economy and addressing operational challenges, including the pressure on their staff,” said Andrea Enria, Chair of the ECB Supervisory Board.
Capital and liquidity buffers have been designed with a view to allowing banks to withstand stressed situations like the current one. The European banking sector has built up a significant amount of these buffers. The ECB will allow banks to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR). The ECB considers that these temporary measures will be enhanced by the appropriate relaxation of the countercyclical capital buffer (CCyB) by the national macroprudential authorities.
Banks will also be allowed to partially use capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital, for example Additional Tier 1 or Tier 2 instruments, to meet the Pillar 2 Requirements (P2R). This brings forward a measure that was initially scheduled to come into effect in January 2021, as part of the latest revision of the Capital Requirements Directive (CRD V).
The above measures provide significant capital relief to banks in support of the economy. Banks are expected to use the positive effects coming from these measures to support the economy and not to increase dividend distributions or variable remuneration.
In addition, the ECB is discussing with banks individual measures, such as adjusting timetables, processes and deadlines. For example, the ECB will consider rescheduling on-site inspections and extending deadlines for the implementation of remediation actions stemming from recent on-site inspections and internal model investigations, while ensuring the overall prudential soundness of the supervised banks. In this context, the ECB Guidance to banks on non-performing loans also provides supervisors with sufficient flexibility to adjust to bank-specific circumstances. Extending deadlines for certain non-critical supervisory measures and data requests will also be considered. In the light of the operational pressure on banks, the ECB supports the decision by the European Banking Authority to postpone the 2020 EBA EU-wide stress test and will extend the postponement to all banks subject to the 2020 stress test.
Banks should continue to apply sound underwriting standards, pursue adequate policies regarding the recognition and coverage of non-performing exposures, and conduct solid capital and liquidity planning and robust risk management.
These actions follow a letter sent on 3 March 2020 to all significant banks to remind them of the critical need to consider and address the risk of a pandemic in their contingency strategies. Banks were asked to review their business continuity plans and consider what actions could be taken to enhance preparedness to minimise the potential adverse effects of the spread of the coronavirus. ECB Banking Supervision will engage with banks to ensure the continuity of their critical functions. The ECB Supervisory Board is monitoring developments; these measures will be revised as necessary.”
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